Everything You Need to Know About Hotel Feasibility Studies
Whether youโre assessing the viability of a hotel development project or looking to get a better grip on how to optimally position your project, a professional hotel feasibility study can be an excellent investment when done with mindful consideration about how to effectively carry it out.
Embracing the feasibility process will shed a lot of light on how to ensure the business stays competitive and consistently profitable, helping to mitigate a large chunk of development risk. In order to understand the feasibility process better, allow us to take you through what a hotel or resort feasibility study entails, the focus areas for the hotel feasibility report, and the overall purpose of this critical process.
What is a Hotel Feasibility Study?
The study is an in-depth analysis of the project proposal - usually carried out during the planning stages - to assess how the business will perform against the goals set by the owner. The process looks at several key areas, including costs and financing, competitive set and competitive differentiators, market supply and demand, project growth, air access, and much more.
For current and potential investors, it is an especially important process as it shows how they can position the project to maximise their return on investment (ROI). For project owners, taking a collaborative approach to the feasibility exercise can help shine a lot of light on whatโs been happening in the market, what threats might lie ahead, and what tweaks you could be making to your project to give it the best chance of commercial success.
How much does a hotel feasibility study cost?
You may see the value in conducting a feasibility study, and ask yourself, โHow much does a hotel feasibility study cost?โ
The purpose of conducting a hotel feasibility study is to generate a set of very thorough and data-driven recommendations, so its costs are usually considerable. This is especially true if you choose to partner with established hotel feasibility study companies that charge higher rates for their proven services. That said, lacking access to a feasibility report can be far more costly, as its insights can save you significant capital further down the line.
The costs behind hotel feasibility studies can vary widely depending on the scope of the project, its location, and the current dynamics of the market.
For example, it is typical to expect a feasibility study for a medium-sized hotel in a competitive urban market to range between $20,000 and $50,000 USD. Smaller boutique hotels or those in less competitive markets might be able to conduct a feasibility study for a slightly lower price, but typically $20,000 USD is a minimum from a reputable independent firm. Although larger and more complex projects, such as luxury resorts or mixed-use developments, can see costs climb to $100,000 USD or more.
Costs can reach such high figures because they typically include a wide range of services. These include market analysis, calculating cash flow, evaluating the siteโs potential, consulting services, and more. Not to mention, utilizing the services of larger international firms with extensive expertise may also mean paying premium fees.
Rather than an expense, think of this report as an investment in the foundation of your business strategy. It can help you to make more informed choices as the project progresses. It also helps set timelines that are critical to operational plans, projections for profitability, and return on investment.Plus, it is a way to avoid the common pitfalls that can prove more costly than investing in generating the report.
Why Commit to a Hotel Feasibility Study?
There are significant benefits to performing a feasibility study, especially if it is performed early in the planning stages of the project. Letโs take a look at a number of these below.
Project Scale and Sustainability
A hotel feasibility study allows those in charge of the project the time, space and support to make meaningful changes within the critical planning stages of a development. A hotel or resort that is unfeasible at a particular scale can be always downsized in line with the findings of the study. This way, developerโs end up building something with long-term potential before incurring devastating costs. This turns a potentially unviable project into a successful one.
Confidence and Fund Raising
In order to attract funding to move your project forward, you have to be able to give verifiable, robust and detailed answers to questions about the strategy behind the project, the projected returns and the projectโs sustainability. Conducting a hotel development feasibility study makes raising funding easier, adds strength to your proposal, and shows partners concrete evidence that your project will hit the required marks.
Sidestepping Risk for Better Decision-Making
One of the biggest benefits of conducting a hotel feasibility study is that you can uncover and avoid potential risks before they escalate into costly problems.
For example, consider a feasibility study that reveals your proposed target site is actually oversaturated with competitors. Or a scenario where market demand for planned amenities ends up ranking lower than expected. These can be costly problems, but armed with the information from your study, you can adapt the scale or concept of your project accordingly.
Feasibility studies also provide helpful insights into the ups and downs of factors like occupancy rates or room pricing, and how they could impact your hotel profitability. Similarly, this allows you to make proactive changes to reduce risk and increases your odds of success. In other words, by better aligning with market realities, you can make stronger, data-backed choices for a brighter future.
More Fitting Operational Strategies
Conducting a hotel feasibility study also offers recommendations into your operational approach. This can redefine your ability to provide the exact services or solutions hotel guests are looking for.
Here are some examples that paint the picture. For one, your study might reveal that a mid-market hotel can outperform a luxury concept in your target area due to its family-friendly appeal. Further, you might emphasize amenities for families, such as larger rooms and flexible dining options, to better appeal to that market demographic.
By using these studies to highlight unmet demand in the local area, you can design operations that truly resonate with the community. Updating your operational strategy to better suit market demand is key to ensuring that your project is not only financially viable, but doubles down on the features that truly maximize revenue and sustained success.
Key Aspects of Hotel Feasibility Anaysis
A hotel feasibility report addresses aspects of the project relating to the physical property, the local area, a market analysis, financial feasibility, and more. Letโs take a closer look at some of the key inclusions.
Local Area and Economy
This is a wider perspective of the area the hotel will operate within, looking at the economic, social, environmental and governmental makeup of the location. The analysis will look at population trends in the area, household growth and economics, local tourist attractions and transport links.
Youโre building your hotel for the long term, so it will be important to compliment your locality and to ensure that your locality can support your employment needs. You may also be reliant on your locality for ongoing revenues, and those expectations need to be built upon realistic comparables in the market.
The Site Review
This review of the land, buildings and structure of the site includes aspects such as connectivity to local utilities (electricity, water and sewerage), whether the site is suited to a project of your size, traffic and access points or physical restrictions on the site.
It also covers the availability of nearby amenities that complement the proposed hotel or resort, and local environmental or governmental restrictions and zoning laws that can limit building or place additional requirements on buildings on the site.
For example, building a hotel resort on an environmentally-protected site may only be allowed if it meets certain restrictions on capacity and site usage, and implements certain systems to meet criteria for Green buildings.
Proposed Costs for the Development
This is one of the most interesting sections of a feasibility report for a hotel project, and usually works hand-in-hand with proposals from the projectโs architectural partners, or at least based on similar projects that have been recently constructed.
It looks at the physical size of the proposed project and associated requirements (number of rooms, bathrooms, amenities, restaurants, etc.) as well as costs associated with developing the project independently versus working within a franchise.
Proposed Occupancy
This is a projection closely linked to income projections that is based on the likelihood of the number of rooms being occupied through the different seasons (based on historical performance of similar projects), ability to penetrate the market, demand generators, the average daily rate for the project to be feasible, and more.
Applying industry knowledge to get a true and real expectation of the relevance of local and regional comp sets is critical to the success of this metric.
Hotel Market Analysis
Similarly, a market study also impacts projections for profitability, focusing on a thorough analysis of local and regional markets and proposed target market feasibility.
This looks at critical factors including how much a room is expected to earn based on the target market, projected growth in the market and local population, the current state of competitors in the same area and the hotel industry at large, and an analysis of other hotel proposals for the area that may compete with the project the hotel feasibility report is focused on.
You can learn more about how to do market analysis like a pro in our guide here.
Hotel Financial Analysis
This is the most critical section of a feasibility study in the hospitality industry because all potential investors will rely on this information to determine whether or not it is a worthwhile investment to make.
Essentially, this section projects the propertyโs income generating capacity, budget expenses, operating costs, potential gross revenues, fixed and other expenses, budgeting considerations, profit and loss projections, cash flow projections, and the net operating income of the property over a set period.
You can learn more about Proven Partnersโ financial analysis and modeling services here.
General Hotel Feasibility Analysis
This feasibility analysis brings together all the above studies to assess the viability of the project on a financial level. Essentially, this study answers one question: Will the money needed to finance the hotel result in long-term sustainability? If the answer is yes, then it should deliver an attractive annual rate of return for investors and potential buyers should a sale occur.
Tourism Feasibility Study
Finally, a specific hospitality feasibility study for travel and tourism might differ somewhat from a business hotel feasibility analysis. These are usually destination focused, and take a broader approach to the core infrastructure needed to build that destination.
Remote and rural resorts are often extremely reliant upon their larger destination. Be sure to include those details in your feasibility study for hotel projects in the remote tourism sector as it will be crucial to your project analysis.
Expert Guidance from Hotel Feasibility Specialists
Determining the economic viability and sustainability of a serious project like a hotel or resort requires local market knowledge and considerable experience.
Proven Partners is an established leader providing the industry's best Hotel Feasibility Studies. Our expertise, guidance, and experience allow us to create the comprehensive hotel feasibility reports you need to move forward with confidence.
To ensure your feasibility study is actually feasible with proven results, contact us today.
